Question

a. find a price of Bond A, a 1-year zero-coupon bond, which has a return of 6.6% and a face value of $1000. Show calculations and formula.

b. would you prefer Bond A to Bond B, a 1-year zero coupon bond which sells for $ 910 and has a face value of $1000, show and explain.

c. would you prefer Bond A , Bond B or Bond C is a 1-year zero coupon bond with face value of $500 and sells for $470, show and explain

Answer #1

(a) If Bond price be P, then

P x 1.066 = $1,000

P = $1,000 / 1.066 = 938.09

(b) If return on bond B be R% per year, then

$910 x (1 + R) = $1,000

1 + R = $1,000/$910 = 1.0989

R = 0.0989

R = 9.89%

Since return on bond B is higher than return on bond A (9.89% > 6.6%), I will prefer bond B.

(c) If return on bond C be R% per year, then

$470 x (1 + R) = $500

1 + R = $500/$470 = 1.0638

R = 0.0638

R = 6.38%

Since return on bond B is highest than return on bond A (9.89% > 6.6% > 6.38%), I will prefer bond B.

a 10 year zero coupon bond with a yield to maturity of 5% has a
face value of $1000. An investor purchases this bond when it is
initially traded, and then sells it five years later. What is the
rate of return of this investment, assuming the yield to maturity
does not change? Answers say 4.01% can someone please explain this
and show their working? Thank you.

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1-year
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6.3
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6.4
3-year
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6.5
4-year
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6.6
a. If you believe that the term structure next
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6.1
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2-year
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6.2
3-year
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6.3
4-year
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6.4
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5.8
4-year zero-coupon bond
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